The rapid advancement and implementation of Artificial Intelligence (AI) within the financial advisory sector has now captured the attention of regulators. From Congress to the Securities and Exchange Commission (SEC), multiple entities are actively engaged in efforts to protect consumers, putting forth regulatory proposals, releasing official statements, and launching investigations. While consumer and industry safeguards are necessary, it is crucial that any government endeavor to regulate AI in financial services steers clear of a piecemeal approach.
Most recently, the SEC proposed rules requiring broker-dealers to eliminate possible conflicts of interest from AI. But the SEC isn’t alone. Over the last few weeks, Massachusetts Secretary of the Commonwealth launched an investigation into how firms are using this technology, the Consumer Financial Protection Bureau (CFPB) released issue spotlights on the adoption of AI by financial institutions, and Congress has held various hearings on AI, signaling that further action from the state and federal levels is imminent.
These actions, occurring in close succession, underscore the challenge firms using AI may face – an overly complex and fragmented regulatory landscape. For financial advisors innovating their practice, a hodgepodge of investigations and regulations could inadvertently hinder the delivery of AI benefits to clients and pose challenges for businesses to adapt swiftly to evolving market needs.
To ensure consumers are protected without obstructing innovation that can benefit them in the long-run, it is imperative for the various regulatory bodies overseeing the financial advisory industry to work together on AI regulation. This collaborative approach is essential to ensure that the regulatory framework is consistent, pragmatic, and supportive of responsible innovation, thereby fostering an environment conducive to both business growth and client well-being.
While regulators are only beginning to pay attention to AI, 90 percent of financial advisors have already harnessed it and other data analytics technologies. These tools have revolutionized the ability to efficiently process and understand vast financial datasets, scale insights, and expedite decision-making, particularly in portfolio management and risk assessment. Advisors are leveraging the tools to deliver greater returns on investment for clients.
AI also enhances efficiency by streamlining administrative tasks, liberating advisors to focus on tasks that demand human expertise – cultivating client relationships, gaining deeper insights into client needs, and facilitating their journey towards achieving financial goals.
AI is not a replacement for human-centered guidance, but rather gives advisors the time to dig deeper into their clients’ financial aspirations. The full value of these advanced analytical tools is unlocked when used alongside human guidance. AI systems lack the intrinsic capacity to comprehend the intricate tapestry of emotional nuances, personal motivations, and unique desires that underlie financial choices. The weight of sacrifices made to fund a child's education or the profound impact of corporate downsizing holds resonance for human financial advisors, yet escapes the grasp of AI.
While the benefits of these tools are innumerable, our industry would benefit from smart regulation to uphold the highest standards of integrity and safeguard the interests of investors. There are legitimate concerns about AI maintaining the same fiduciary responsibility as human advisors, and the SEC and other regulatory bodies have a responsibility to ensure bad actors are not irresponsibly deploying the technology to the detriment of investors and the reputation of responsible wealth advisors.
Already, there is an increasing wave of fragmented regulatory measures, from state securities regulators, the Financial Industry Authority (FINRA), and plenty others, that jeopardizes the ongoing innovation within wealth management. The AI space is rapidly evolving, and regulators would benefit from reaching out to firms innovating with these technologies when creating rules. Fintech companies, like Farther, have been implementing AI into their processes for years and understand the stakes that are at hand. Policymakers could really learn a great deal from startups who are utilizing AI responsibly, to the benefit of both their advisors and clients.
Regulatory bodies and firms are aligned with a common goal: to facilitate broader access to the transformative potential of investing. Achieving this is within reach through the implementation of computational and quantitative methods and AI technologies. However, maintaining positive momentum necessitates regulatory consistency.
